Stable demand for cement to up investors' confidence
Post a robust June quarter, the worst seems to be behind for the cement industry. If analysis done by brokerages is anything to go by, investor confidence is seen to be regaining on the back of improved realisation of around 76 per cent clocked by the top three cement companies followed by stable demand and pricing in recent months.
Also, a 10 per cent drop in imported coal prices since April 2012, with a stable currency, which analysts believe will lend some relief to cement majors in the coming quarters. After considering all these factors, analysts expect strong earnings growth which will also drive stock performance, hereon.
Interestingly, cement stock have risen anything between 25 per cent-100 per cent. For instance, ACC and Ambuja gave around 25 per cent returns to investors, Madras Cements have gone upto around 75 per cent, JK Cement is also in line with its peers with a 158 per cent increase along with Ultratech which saw its share price grow around 50 per cent.
Motilal Oswal expects FY13 realisations to improve by around Rs 17-23/bag. The firm also believes that though prices are at peak, they need to increase further to generate economic returns for new plants."Current cement prices are still Rs 40/bag below the longer-term viable pricing. We believe higher capex cost of upcoming supplies will provide strong support to cement prices," stated the firm.
However, the brokerage also points out that any intervention by the government to curb cement prices is a key risk for the industry. In the past, the government has intervened in free pricing of cement to curb inflation. This had severely impacted operating performance of the cement companies and their stock prices.
With so many positives, analysts do agree that land acquisition issues, inadequate raw material supply may hamper expansion plans of cements companies who are sitting on a large cash reserve. This means cement makers would be able to continue with their pricing power in the coming years, say an analyst.